Volume 5, Number 1 • January 2008

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Directors & Boards
Robert H. Rock
Publisher

James Kristie
Editor

Lisa Cody
Chief Financial Officer

David Shaw
Publishing Director

Scott Chase
Advertising Sales Director

Nancy Maynard
Account Executive

Barbara Wenger
Subscriptions

Jerri Smith
Reprints

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From Jim Kristie   |   Article of the Month   |   Columnist
Reader Profile   |   Research   |   News | 



Five Boardworthy Resolutions for 2008
Our colleague John Budd came up with some harmonious tactics to soothe the savage breast of your shareholders. 



What’s a director to wish for in 2008? Peace and harmony on the shareholder front is probably not in the cards.

RiskMetrics Group issued a prediction on the day after Christmas that the coming proxy season could be the most contentious in recent memory. Proxy access proposals are still alive, notwithstanding the SEC’s decision to punt on the matter of tweaking the nomination mechanism. “Say on pay” will be heard loudly. And the advisory firm, which completed its acquisition of Institutional Shareholder Services Inc. in 2007, is also anticipating that board leadership concerns will surface strongly this season.

How about the following as worthy New Year’s resolutions for a director? They come from John Budd, chairman of The Omega Group. I admire John as someone who deeply cares about how business conducts itself on the public policy and stakeholder relations fronts. Anyone who knows John knows that he is a man of strong opinions. He formulates his stinging critiques for Observations, a bimonthly “policy impact paper” as he calls it.

His latest issue came into my hands during the holiday week. John actually came up with 10 New Year’s resolutions for board members, but I cherrypicked the following five:

1. I will ask the third and fourth question that finally pierces the veneer of management’s often obtuse, protective response.

2. I will recognize — and accept — the importance of nonfinancial factors in forming shareholder judgments and see to it that soft values (vs. hard assets) are addressed proportionately.

3. I will consistently bear in mind that the ultimate judge of best practices are the shareholders — not regulators or my peers.

4. Judging attitude on a par with aptitude, I will be sensitive to the demeanor and personality of the chief executive, and counsel, privately, should it be necessary.

5. I will do what I can to assure that my board is proactive not reactive, accepting the sports maxim that the best defense is an offense.


For his full list of boardworthy New Year’s resolutions, email John at jfbuddjr@aol.com. I’m sure he’ll be pleased to hear from you, being the passionate advocate of good governance that he is — especially if you ask to take out a subscription to his Observations … to complement your subscription to Directors & Boards, of course.

If predictions hold true that total calm is not in the cards for your board/shareholder relations, the team here at Directors & Boards can still wish you peace and harmony in your personal and professional lives in 2008. Thank you for your readership and support.

Jim Kristie is the editor and associate publisher of  Directors & Boards.

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Governance Web Pages:
Reaching Their Potential?
A few early movers see the Web as a good place to tell their governance story.

By Nicole Sandford

When stock exchanges began allowing companies to make certain governance disclosures on their Web sites several years ago, virtually every public company created a section for this purpose. These Web pages are one of a few precious sources for investors seeking to learn about a company’s board and governance practices, and are a common source of information for corporate governance and other ratings agencies.

At a recent committee meeting of the Society of Corporate Secretaries and Governance Professionals, I asked the approximately 50 governance professionals in attendance if they view their Web sites as critical communication vehicles for investors. Nearly three-quarters of them said yes.

Then I asked them to raise their hands if they believed their sites did a good job of conveying their board’s governance processes and practices. Few hands went up.
Several concluded that the time may be right to revisit the sites given the movement toward electronic proxies which will be posted to corporate Web sites.

[Click Here to Read the Entire Article]

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Out with the Look-Alike, Think-Alike Board
A final summing up by the fondly remembered founder of Directors & Boards.


By Stanley Foster Reed

Ed. Note: Stanley Foster Reed, founder of Directors & Boards, died on Oct. 25, 2007, at the age of 90. The first quarter 2008 edition of Directors & Boards, to be mailed to subscribers later this month, features a tribute to this remarkable individual. He was a multidimensional entrepreneur adept in creating ventures that straddled the business, science, government, and publishing sectors. The following is an excerpt from an article he composed for the journal’s 20th anniversary special edition published in 1996 about why he launched Directors & Boards two decades previously.


While I didn’t know then as much about management as I know now, I knew that those boards that I had been serving on since the 1960s were ineffective. They lacked diversity. Board membership was the result of shared experience either on the golf course, in college, or in social congress. We directors all looked alike, dressed alike, talked alike, and enjoyed each other’s company.

They were think-alike boards. There were never arguments.

So I founded Directors & Boards to help stakeholders create effective boards. One of my targets was the think-alike board.

Management guru Warren Bennis had a word for management teams that looked alike, talked alike, and, of course, thought alike. He called them groups of doppelgangers — “ghostly doubles” — because they all looked and acted like the leader who had selected them. And Bennis believed that such groups make bad management decisions.

[Click Here to Read the Entire Article]

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Carl Famiglietti, CPA, ABV, CVA
Managing Partner
Moody, Famiglietti & Andronico

Editor's note:  Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today.  If you'd like to participate in this section in the future, please email Scott Chase. 



You’ve mentioned you see the CPA and consulting world evolving.  Why should leaders take notice?

Sarbanes-Oxley and directives for Boards and corporate policy have changed company structure quite a bit, and the effects go well beyond internal controls.  By streamlining and increasing transparency, compliant companies have access to more advanced data streams and measurement techniques that allow them to be fiercer and more nimble competitors.

One of the most striking changes is the ease with which an organization can be viewed top to bottom, and Boards are more equipped than ever to gather reliable intelligence from the front lines of their enterprise.  This provides the opportunity to understand needs earlier, recognize the areas in which specialized knowledge can bring benefits, and explore alternatives in rapidly changing consumer, business and capital markets.

Progressive companies that compete on ingenuity see that specialized knowledge is best sourced from specialist firms, which were much less common a decade ago.  The evolution of the CPA and consulting world is evident in the rise of these specialized firms, as they gain strength by addressing this market need for quick, innovative, and exacting execution.

Corporate leaders that tap these resources enjoy improved independence, cost savings, and senior level expertise that helps drive the speed and depth of achievement of their company’s strategic and tactical objectives.

Didn’t we already see a big shakeout last decade, when the Big 8 split these disciplines up?

Absolutely, and that shakeout had significant short term effects that laid the groundwork for these structural changes. 

[Click Here to Read the Entire Article]

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Despite Recognition Of Tax Risk On Corporate Agendas, Many Companies Lack Tax Risk Management Strategy, Survey Says

While identifying and managing tax risk is clearly becoming a higher priority on corporate executive agendas, a recent survey of senior executives by the Tax Governance Institute revealed that a majority of companies do not have a formal, documented tax risk management strategy in place.

According to the e-survey of 546 respondents – including board members, senior manage-ment, chief financial officers, tax executives and financial/accounting professionals – 60 percent of respondents believe that the assessment and management of tax risk has become a greater priority for corporate leadership during the past 12 months.  The top reason cited was enhanced regulatory pressures for greater transparency in tax reporting, followed by the need to identify and monitor material weaknesses and increased examination activities by taxing authorities.
 
Yet, at the same time, the survey revealed that almost 60 percent of respondent companies do not have a formal, documented tax risk management strategy in place.

“It’s heartening to see that enterprise tax risk is rising on the radar screens of U.S. business management, but it’s clear from the survey results that more companies need to devote attention to implement policies to manage their tax risk,” said Hank Gutman, director of the Tax Governance Institute and a principal in KPMG’s Washington National Tax practice.

Where companies are without a formal policy, 31 percent do not believe a tax risk management strategy is a priority, and 29 percent think their tax risk profile is in order. Among companies that have a tax risk management strategy, 41 percent said their chief financial officer ultimately reviews and approves it, followed by 33 percent who cited the board or a committee of the board as responsible. 

The survey also revealed that the responsibility for reporting tax risk issues to the board was a contested topic. Not surprisingly, 75 percent of tax executives believe they should be responsible for communicating tax risks within their organization. However, only 15 percent of chief financial officers and 16 percent of audit committee/board members believe the tax director should have this role. By contrast, 79 percent of chief financial officers believe it is their responsibility and 70 percent of audit committee/board members also believe the chief financial officer has the organizational responsibility. 

Among other survey highlights:
  • Only 41 percent of respondents are “very satisfied” that their organizations’ tax positions are consistent with management’s tolerance for tax risk.
  • Enhanced regulatory pressures for greater transparency in tax reporting were also cited as the greatest challenge respondents’ companies face in the next two years (29 percent).  
  • Some 53 percent say financial reporting risks are the most significant aspect of tax risk facing organizations.
  • Risk of non-compliance with tax laws was the most common definition of tax risk (73 percent).
  • Almost half (46 percent) of respondents said that senior management and the board are briefed quarterly on tax risk management issues.
The Tax Governance Institute Tax Risk Survey was conducted electronically from Sept. 5 to Sept. 19, 2007.

The Tax Governance Institute (http://www.taxgovernanceinstitute.com) is an open forum for board members, corporate management, stakeholders and government representatives to share knowledge regarding the identification, oversight, management, and appropriate disclosure of tax risk. Launched in early 2007, it currently has more than 7,000 members, including audit committee members, board members, chief financial officers, senior tax executives and regulators.

KPMG LLP, the audit, tax and advisory firm (http://www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International's member firms have 123,000 professionals, including more than 7,100 partners, in 145 countries.

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January 13-14, 2008
Directors Forum 2008 will be held at the University of San Diego. Bringing together institutional investors, directors, officers, and regulators, the event will feature such speakers as former H-P Chair Patricia Dunn, Alan Murray of the Wall Street Journal, Ralph Whitworth of Relational Investors LLC, and James A. Johnson, director of United Health Group, Goldman Sachs, Target Corp., and other companies. To register, visit http://www.directorsform.org

January 17, 2008
The Forum for Corporate Directors (FCD) will hold an important meeting to address critical issues for the coming proxy season. Featured speaker will be Louis M. Thompson Jr., managing director of Kalorama Partners LLC, a Washington consultancy in the areas of corporate governance, risk assessment and crisis management. He was longtime CEO of the National Investor Relations Institute and is an adviser to the SEC as well as to the NYSE's Individual Investor Advisory Committee. The FCD is a leading Southern California resource for promoting excellence in governance and board leadership. Visit http://www.fcdoc.org

January 29, 2008
Drexel University's Center for Corporate Governance http://www.lebow.drexel.edu/Centers/CorpGov/index.php will present "Leadership Lessons: Public vs. Private," a breakfast briefing that explores the experiences of CEOs and board members who have operated in both forms of ownership. Directors & Boards Chairman and Publisher Robert H. Rock, who has been a director of several public companies that went private, will moderate the panel, which will include Stan Silverman, former CEO of PQ Group, which was acquired by a private equity firm, and Harry Jansen Kraemer Jr., former CEO of Baxter International who is now executive partner with PE firm Madison Dearborn Partners. Bob Rock will also be honored at the event for his leadership of the journal and its 30 years of service to the governance field. The event is part of Drexel's "Inside the Boardroom" series of briefings held several times each year for CEOs and board members. For information contact Tamika Washington at tamikaw@drexel.edu.

February 20-21, 2008
The Tax Council Policy Institute will hold its 9th Annual Tax Policy and Practice Symposium at The Ritz-Carlton Hotel in Washington, D.C. The program is titled "Future Shock? Impact of U.S. Fiscal Policy on Corporate Taxation in an Increasingly Competitive Global Marketplace." The symposium will bring together leading professionals and policymakers from government, industry, and academia to take an in-depth look at critical tax issues facing U.S. businesses today. Roger LeMaster, executive director of TCPI, warns that "Tax executives will face a variety of challenges bound to make 2009 a potential watershed year for the structure of the U.S. tax system." KPMG LLP, the audit, tax, and advisory firm, will serve as program manager for the 2008 event. For additional information, visit http://www.tcpi.org

February 27-29, 2008
The Directors' Consortium, a joint offering of the University of Chicago Graduate School of Business and Tuck at Dartmouth, will conduct a three-day intensive program exploring the fundamentals of corporate governance and board service. Leading faculty from five world-class institutions will present a comprehensive approach to the complex decisions that board members must make. The program will be held at Chicago GSB. For information, visit http://www.directorsconsortium.net

February 28-29, 2008
The Center for Political Accountability along with Wharton School's Center for Business Ethics Research and Baruch College's Zicklin School of Business present "Money, Politics and Corporate Risk." The conference will examine the role of corporate governance as a counterbalance to political pressure and when and how corporations should participate in politics - and, in particular, the director's responsibility for establishing policies and overseeing company political activity. Speakers will include prominent public officials, scholars, journalists, and business people, among them Leon Panetta, former OMB director and White House chief of staff; John C. Coffee Jr., Adolph A. Berle Professor of Law, Columbia Law School; William C. Thompson Jr., comptroller, City of New York; Gerald Greenwald, former CEO of UAL Corp.; and Dan Bross, senior director of corporate citizenship at Microsoft. To register, visit http://zicklin.baruch.cuny.edu/mpcr1

May 29-31, 2008
The International Policy Governance Association's 5th Annual Conference will be held in Vail, Colo., at the Vail Marriott Mountain Resort and Spa. Themed "Together at the Top: Building Peak Performance Boards," the event will bring together board members, CEOs, senior management and board advisers and individuals at any level of Policy Governance knowledge and experience for workships, plenary sessions and networking opportunities with Policy Governance practitioners and experts from around the world. For more information, visit http://www.ipgaconference.org


Survey Targets C-Suite On Advanced Document Management
Océ Business Services has launched a brief survey that invites C-level executives to take a penetrating look at how organizations are leveraging advanced document management to improve business performance. The resulting survey data will help executives better understand how effective document processes can drive business benefits such as enhanced regulatory compliance, improved operational efficiency, increased competitive advantage, and reduced costs. Survey participants will receive a free copy of the research report. To take the survey, click here.

Decrease in Poison Pills, Term Limits for Directors, among Key Governance Trends
U.S. public companies continue to evolve their governance practices, especially those relating to voting matters, director independence, qualifications and time commitments, related party transactions and shareholder proposals, according to Shearman & Sterling’s fifth annual Corporate Governance Survey of the largest US public companies.

Several findings in this year’s Corporate Governance Survey include:
  • Between 2004 and 2006, some of the most intense shareholder pressure was focused on the voting standards in director elections, which has resulted in a dramatic increase in the number of companies using a majority voting standard. Fifty-six of the 100 companies surveyed this year now require directors to be elected by a majority of the votes cast rather than a plurality.
  • As a result of continued shareholder pressure, the number of companies with "poison pills" and/or classified boards continues to decrease. Of the 100 companies surveyed this year, 17 had poison pills in place, compared to 33 of the companies surveyed in 2004; and 33 of the companies surveyed had classified boards, which represents a marked decrease from 54 in 2004.
  • Of the 22 top 100 companies at which separate individuals serve as chairman and CEO, only five have adopted policies requiring separation of the two functions.
  • Companies requiring term limits for their directors rose steadily between 2004 and 2006 but dropped this year from 71 companies to 66.

This year’s survey comes in two parts — the fifth annual examination of general governance practices (click here for a PDF copy) and a new annual report on executive and director compensation practices (click here). The survey is also available on request from Shearman & Sterling’s web site at http://www.shearman.com/corporategovernance.

Robust M&A Market in 2008 Ahead for Small to Midcap Companies
A bullish call on merger and acquisition activity among small and midcap companies was made by Jim D’Aquila, managing director of The Mercanti Group, the boutique investment banking firm focused on this sector. Among the factors he sees as driving the trend:
  • Capital, which moved to the sidelines as assets got pricier, is now poised to return.
  • More realistic leverage ratios, debt pricing, and equity return expectations.
  • High quality companies will continue to be highly in demand.
  • A new class of investors — business development corporations, SBICs, special purpose debt funds — that are unaffected by the subprime meltdown.
  • Continued liquidity in the financing markets albeit at slightly reduced leverage ratios.

Director Resources
Audit Committees: The Center for Audit Quality (CAQ) is seeking the opinions of directors who serve on audit committees of publicly traded companies. The CAQ has launched a survey designed to solicit input on changes in the role audit committee members play, and perceptions on the audit itself since the passage of the Sarbanes-Oxley Act. The CAQ is an autonomous public policy organization serving investors, public company auditors, and the capital markets. Audit committee members are strongly encouraged to click here and complete a brief survey. Responses will remain confidential and be used to provide important information for ongoing, high-level public policy deliberations. The deadline for responses is January 30.

Financial Risk: Daylight Forensic & Advisory LLC, a regulatory and investigative consulting firm, has developed proprietary software that assesses the level of risk in mortgage-backed securities (MBS). The new tool will allow financial institutions to evaluate securities' underlying loans to determine the risk of default, nonperformance, and fraud. It will also evaluate current and future exposures and lets MBS investors, such as hedge funds and investment banks, minimize their potential losses. "This is a breakthrough product for our firm," said Ellen Zimiles, Daylight's CEO and co-founder.

CEO Compensation: The median year-on-year increase in CEO pay was just under 13%, according to the fifth annual survey of CEO compensation by The Corporate Library. The research report is one of the most comprehensive in the market, covering over 3,000 U.S. corporations, and is based on the latest available data from proxies filed through October 25, 2007. Pay rises in the S&P 500 were far higher than those for their peers in smaller companies, with the median increase topping 23%, and median total pay over $8.8 million. The study also examines in detail the 30 highest paid CEOs in 2006/7 to determine whether the shareholder returns they have delivered justify total compensation figures of between $40 million and $322 million. Click here for information on accessing the full survey.

Corporate Accountability: After months in development and extensive testing, the Web portal Accountability Central launched in December. The Web publishing platform is designed to help inform and update leaders in the private, public, and social sectors on critical “accountability” topics and issues through daily delivery of news, commentary and opinion, research, and current developments. It has been created and is managed by the Governance & Accountability Institute Inc., a research, publishing and information services company chaired by Henry (Hank) Boerner.


Author Notes
James Reda testified to the U.S. House of Representatives Committee on Oversight and Government Reform on the role executive compensation advisors play to ensure independence from a perceived conflict of interest. The Committee released a report that found compensation consultant conflicts of interest are pervasive. Mr. Reda’s statement included the observation that “… we are in favor of providing corporate board members with a higher standard of disclosure to verify the independence of the compensation advice they receive from consulting firms. Such an added disclosure can help remedy the negative perception executive compensation holds with shareholder groups, the public and the media.” James F. Reda & Associates is an independent executive compensation and corporate governance consulting firm that offers no additional unrelated services to management.

William T. Keevan has been named to lead Kroll’s Forensic Accounting and Litigation Consulting (FLC) practice in the United States. After joining Kroll in December 2006, Mr. Keevan led the firm’s Washington, D.C.-area FLC practice as well as Kroll’s Government Contractor Advisory Services business on a national basis.
 
Kerrie Waring has been appointed chief operating officer of The International Corporate Governance Network. Ms Waring joins the ICGN from the Institute of Chartered Accountants, England & Wales, where she has been corporate governance manager. The COO position has been created following a rapid growth in ICGN’s membership, which now exceeds 500 in 40 countries worldwide. ICGN members include institutional investors responsible for global assets of $15 trillion.

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